In addition to being thought of as a form of multiple regression focusing on causality, path analysis can be viewed as a special case of structural equation modeling (SEM) – one in which only single indicators are employed for each of the variables in the causal model. That is, path analysis is SEM with a structural model, but no measurement model. Other terms used to refer to path analysis include causal modeling, analysis of covariance structures, and latent variable models.

In the model below, the two exogenous variables (Ex1 and Ex2) are modeled as being correlated and as having both direct and indirect (through En1) effects on En2 (the two dependent or 'endogenous' variables). In most real models, the endogenous variables are also affected by factors outside the model (including measurement error). The effects of such extraneous variables are depicted by the "e" or error terms in the model.

Using the same variables, alternative models are conceivable. For example, it may be hypothesized that Ex1 has only an indirect effect on En2, deleting the arrow from Ex1 to En2; and the likelihood or 'fit' of these two models can be compared statistically.

In order to validly calculate the relationship between any two boxes in the diagram, Wright (1934) proposed a simple set of path tracing rules,[3] for calculating the correlation between two variables. The correlation is equal to the sum of the contribution of all the pathways through which the two variables are connected. The strength of each of these contributing pathways is calculated as the product of the path-coefficients along that pathway.

The rules for path tracing are:

You can trace backward up an arrow and then forward along the next, or forwards from one variable to the other, but never forward and then back.

You can pass through each variable only once in a given chain of paths.

No more than one bi-directional arrow can be included in each path-chain.

Another way to think of rule one is that you can never pass out of one arrow head and into another arrowhead: heads-tails, or tails-heads, not heads-heads.

Again, the expected correlation due to each chain traced between two variables is the product of the standardized path coefficients, and the total expected correlation between two variables is the sum of these contributing path-chains.

If the modeled variables have not been standardized, an additional rule allows the expected covariances to be calculated as long as no paths exist connecting dependent variables to other dependent variables.

The simplest case obtains where all residual variances are modeled explicitly. In this case, in addition to the three rules above, calculate expected covariances by:

Compute the product of coefficients in each route between the variables of interest, tracing backwards, changing direction at a two-headed arrow, then tracing forwards.

Sum over all distinct routes, where pathways are considered distinct if they contain different coefficients, or encounter those coefficients in a different order.

Where residual variances are not explicitly included, or as a more general solution, at any change of direction encountered in a route (except for at two-way arrows), include the variance of the variable at the point of change. That is, in tracing a path from a dependent variable to an independent variable, include the variance of the independent-variable except where so doing would violate rule 1 above (passing through adjacent arrowheads: i.e., when the independent variable also connects to a double-headed arrow connecting it to another independent variable). In deriving variances (which is necessary in the case where they are not modeled explicitly), the path from a dependent variable into an independent variable and back is counted once only.